On Monday we talked here about mobility. To start this post I reiterate Randal O'Toole's essential argument that increased mobility has created prosperity for Americans. There is no question. If you want the upward mobility of a new job, your prospects are much greater when your range of mobility encompasses many potential employers. For employers, the related fact is also true. Employers benefit from having access to more employees to choose from.
Mobility expands markets. Markets are good. Classic Adam Smith.
Over the break I not only pondered yule tidings and kringle, I spent some time on the issues of mobility and housing. Not in the classic sense (how our mobility has impacted our land use and housing choices) but more along the lines of how our housing mess is going to impact our mobility.
I own my home. More precisely, a bank owns my home and I pay a mortgage payment to them monthly. While I love what I do and have no intention of switching careers, let's pretend that tomorrow I receive a job offer for a career change I can't decline. Let's say....drummer for Paul McCartney. I'm in. Just one catch.
I need to sell my house before I can move.
Can I do it? Well, if I really needed to sell perhaps I could, but that pesky Adam Smith and his markets would put me at a disadvantage. I would probably be forced to sell much lower than I would like as there would be few buyers in my short timeframe and currently many different options on the market.
Now I have some equity, but what if I didn't? What if I owed more on my house than it was worth ("underwater", in the new terminology we are all learning). What would I do then? Paul McCartney may pay well, but what if he didn't? What if I had to come up with the difference? Or was not comfortable with the loss?
The answer is clear: no dream job. I can't move. My pursuit of the American dream of home ownership has rendered me immobile. An indentured servant to The Man. I have to pay off my mortgage - an endeavor measured in decades - or my home needs to rise in value before I get my mobility back.
Our well-intentioned housing policies - a massive, intertwined set of subsidies - have, like many other such schemes, created a disaster. And with our deep dependence on housing values, it is hard to see how we untangle this mess anytime soon.
It is also hard to see how this ends well.
Just prior to Christmas, it was announced that the caps on losses at Fanny Mae and Freddie Mac were removed. This is another in a long series of desperate measures to prop up the housing market. Fanny and Freddie secure risky mortgages that banks won't take. We know this is digging the hole deeper, but the alternative - forcing more people into foreclosure - will certainly result in a massive decline in housing value.
The Federal Reserve also just recently announced that it will begin correcting its balance sheet now that the economy has pulled back from the brink. Fixing the balance sheet means selling bonds, taking excess cash out of circulation and - however slowly they try - ultimately increasing interest rates. Consumers price houses in terms of payments, so rising interest rates will lower home values across the board.
An opinion piece in the New York Times sums it up well.
The economy is hard pressed to function, let alone thrive, when house prices are falling. As home equity erodes, consumer spending falls and foreclosures increase. Lenders lose the ability and willingness to extend credit and employers are disinclined to hire. True economic recovery is all but impossible.
But fall they must. Another article in the NY Times, discussed the Obama Administration program for keeping people in their homes called "Making Home Affordable".
Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.
“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”
And yesterday there was Nobel Prize-winning economist Paul Krugman talking about the likelihood of a double dip recession driven by - you guessed it - the continuing unwinding of the housing market.
I don't really have an answer here, just questions and observations of the obvious. This is bad, and I don't see how it gets better anytime soon without it getting much worse first. We don't have the luxury of continuing with business as usual. We are going to need to look at our towns and neighborhoods through a Strong Towns prism if we want to start transforming our economy into something that can provide us with real, sustained prosperity.